Studies in Islamic Finance, Accounting and Governance series
Chapter 8: The global financial crisis: some suggestions for reform of the global financial system in the light of Islamic finance
The whole world is now in the grip of a financial crisis which is far more serious than any experienced since the Great Depression. It has taken more than three trillion dollars of bail out and liquidity injections by a number of industrial countries to abate somewhat the intensity of the crisis. Nevertheless, there are fears that this crisis may have exposed the world economy to a long period of economic slowdown. There is, hence, a call for a new architecture that could help minimize the frequency and severity of such a crisis in the future (Camdessus, 2000, pp._1 and 7–10; Stiglitz, 2007, p._3; Baily et al., 2008, p._44). It is not possible to design a new architecture without first determining the primary cause of the crises. The generally recognized most important cause of almost all crises has been excessive and imprudent lending by banks. This raises the question of what makes it possible for banks to resort to such an unhealthy practice that not only hurts their own long-run interest but also destabilizes the international financial system. There are a number of factors that make this possible. One of the most important of these is inadequate market discipline in the financial system.
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